Jodi Epstein, a partner in Ivins, Phillips & Barker, spoke to attendees at the 2022 PLANSPONSOR National Conference, in Orlando, with optimism that legislators on Capitol Hill have great interest in developing policies that enable defined contribution plans to offer retirement income.
“Defined benefit plans are going away,” Epstein said, “and DC retirement plans are attempting to put in place what DB plans had, by creating an income stream in retirement. The contributions that participants—and their employers—make to their accounts still need to be distributed. And, with millions of Baby Boomers retiring, the annuity push is in the DC space.”
There are several ways to take retirement income Epstein noted. Taking a lump-sum distribution historically does not work well. “You hope the participant will move the funds into an IRA, but often they don’t do that, and the lump sum is spent in just a few years,” she observed.
From an Employee Retirement Income Security Act point of view, arranging for retirement income requires both the fiduciary role and then the design, or settlor, role. The design question is whether the plan sponsor wants to take on a distribution option. The implementation is a fiduciary role where the sponsor must be conscious of fees, interactions and the quality of the experience for the participants.
“What the DOL [Department of Labor] and the IRS are trying to do is to give the plan sponsor more room so they don’t have to babysit this situation,” Epstein said.
Certain legislation has been instituted. With hopes that participants will become more cognizant of their need for lifetime income, Congress, in 2019, enacted the Setting Every Community Up for Retirement Enhancement—aka SECURE—Act, a provision of which mandated that lifetime income illustrations appear at least once a year in participant statements, starting by this September 18. The DOL has devised assumptions that DC plans may use to estimate the monthly income that workers’ retirement plan balance will likely generate over their lifetime.
In July 2014, IRS regulations allowed DC plan participants to purchase a deferred income annuity if their plan offered one. These annuities are limited to 25% of a participant’s account balance, or $125,000, whichever is less, across all participant funding sources and can pay out for a single life or joint lives. But the deferred income annuity does not count for required minimum distribution purposes. The House-passed version of “SECURE 2.0”—viz., the Security a Strong Retirement Act of 2022—would eliminate the 25% limit.
In-plan annuities can give participants lifetime income during their retirement, but employers “are concerned about being sued for breach of fiduciary duties if the annuity provider they select faces problems years from now and about what their responsibilities would be for ongoing monitoring and oversight of that provider,” she said. A provision in the SECURE Act made it easier to offer lifetime income in a DC plan, relieving plan sponsors of the burden of responsibility for the annuity provider “until the end.”
The legislation protects employers from liability if they select an annuity provider that, along with meeting other requirements, has been licensed for the preceding seven years by the state insurance commissioner to offer guaranteed retirement income contracts. The SECURE Act also increased the portability of annuity investments by letting employees who take another job or retire move their annuity to another DC plan or to an IRA without surrender charges and fees.
Plans may rely on written representation from insurers about their status under state insurance laws. The DOL provided a safe harbor in Field Assistance Bulletin 2015-02.
Portability rules mean a participant may take a distribution of a lifetime income investment if the plan no longer offers that investment. Participants may roll it into an IRA or another retirement plan. If it’s an annuity contract, it may be distributed to the participant.
There’s a lot of work ahead for Congress to make this easier for plan sponsors. According to Epstein, “This is the next retirement trend for early adopters. It’s coming, but it’s complicated.
“Currently, there are no legal stumbling blocks; there is enough of a pathway. But plan sponsors don’t understand annuities; they find them to be expensive, and they’re worried that they’ll add annuities to their plan design and participants won’t use [them].”
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